Draft National Infrastructure Plan

3.5 Planning needs to respond to uncertaint | Me urupare ngā whakamahere ki te pāhekeheketanga

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3.5.1. Context

The Commission’s forward guidance for investment is based on demographic and economic projections. However, we know from history that forecasts are imperfect. Our modelling allows us to understand what may happen under different scenarios. For example, if our population or economy grows at a much slower or faster rate, this would affect our spending on infrastructure investment.

3.5.2.     Strategic direction

Investment flexibility is protected as asset owners manage uncertainty

A significant amount of uncertainty is involved in infrastructure investment. For instance, we estimate that overall infrastructure investment requirements over the next 30 years could range from around 5% to 7% of GDP.^[42] This may not sound like a lot, but the range between these two figures would be equal to $8 billion in 2025.

Some sectors face more uncertainty than others. For instance, future demands for renewal investment are more certain, because they mostly reflect how much infrastructure New Zealand already has, and its condition. Demand for new roads and schools to service population growth is less certain, because we are unsure how rapidly our population will grow in the future. It is even more difficult to predict how preferences and level of service expectations will change over time.

Some types of uncertainty are hard to model. For instance, major technological innovations can cause people to demand entirely new types of infrastructure, to use existing infrastructure in different ways, or reduce the need for infrastructure all together.

Asset owners use sophisticated project planning to manage uncertain futures

The presence of uncertainty requires a more sophisticated planning approach. This is because the costs of getting it wrong can be severe. Building less infrastructure than is demanded can lead to congestion and poor service quality, at least until investment catches up. Building above demand can be even worse, because costly assets that don’t add revenue can become a financial burden for infrastructure providers. Ongoing operating losses and maintenance make it harder to respond to other emerging needs.

It’s easier to respond when more choices are available. When the future is uncertain, it makes sense to plan ahead, keeping options open rather than making large, irreversible commitments that may not pay off. Infrastructure providers can take several practical steps to deal with uncertainty.

Infrastructure providers can consider a broader set of future problems and opportunities in their planning. Rather than focusing on a small number of options for investment, they should think about how they would respond to different scenarios for the future. This is the approach that electricity generators take. They investigate more projects than they may seek to build in the near term to ensure they can respond to rising electricity demand when it occurs.

Providers can invest in land protection for new infrastructure that may be needed in the future. Depending upon the project, this may mean buying land for future projects, obtaining designations for the use of land, or obtaining resource consents to enable future construction. Even when uncertainty exists about whether projects are needed, land protection can be valuable. It ensures that it is possible to build new infrastructure cost effectively when there is demand for it. Other actions, like futureproofing for infrastructure assets to be expanded if additional demand occurs, can also be useful.

Networks can be expanded bit by bit, as demand grows, rather than a ‘big bang’ approach that adds lots of capacity well in advance of demand. Large projects that are expected to take a long time to pay back are likely to be financially riskier than programmes of small projects. Pursuing them carefully, and selectively, is important when facing uncertainty.

3.5.3.   Recommendations

Ongoing updates are needed to ensure that our view of needs remains relevant in a changing world. We make one recommendation (that is focused on the Commission’s work) to regularly update this information, along with other important information in the National Infrastructure Plan.